73 Is the New 70½

All the rules for Required Minimum Distributions (RMDs) changed with the SECURE Act of 2019, and were further updated by the SECURE 2.0 Act of 2022. In this piece I go through the key rules and changes.

Important Ages

There are two important ages in retirement financial planning: 59½ and 73. The former marks the age when you can distribute from your retirement account – IRA or 401(k) – without paying a 10% penalty on the distribution. The IRS, with this penalty, gives us all a reason to keep our long-term savings in place for its intended purpose – retirement income.

The second important age is now 73, and this is the age at which you must begin taking your RMDs from your retirement account. The SECURE Act of 2019 moved the starting age from 70½ to 72. The SECURE 2.0 Act then moved it again – from 72 to 73, effective January 1, 2023. The age will increase once more to 75 starting January 1, 2033.

In summary:

As the name suggests, this distribution is required, whether you want to distribute or not. If you don’t, there is a 25% excise tax assessed against the amount that should have been distributed. This penalty is further reduced to 10% if the shortfall is corrected within two years.

How Do I Calculate the RMD?

You use a factor from a table. Take the prior year-end IRA balance, and divide it by the distribution period (life expectancy factor) from the IRS Uniform Lifetime Table. The IRS updated this table in 2022, reflecting longer life expectancies – which means slightly lower RMDs than under the old table.

You can find the complete table by searching for “IRS Uniform Lifetime Table” or in IRS Publication 590-B.

An Example

Say you have two traditional IRAs. One is with a bank, and the other is with a brokerage company. Each has an end-of-year balance of $500,000, for a total of $1.0 million. You turn 73 this year. How much do you distribute? $1,000,000 ÷ 26.5 = $37,735.85. You can take this amount proportionally from each account, or take it all from one account – your choice. The IRS’s only concern is that the entire required amount be distributed.

As you can see, each year the divisor goes down, which means the RMD goes up. An account can still grow for years, however, while RMDs are being distributed, with good investment choices. Continuing with the previous example, let’s say you took that RMD on January 2nd, so your IRA balances would be approximately $962,264. If you earned 6% during the ensuing year, your end-of-year balance would be $1,020,000. Next year’s RMD is calculated against this amount.

Why Does the IRS Mandate This?

From their point of view, they have “let” you invest with before-tax dollars, and have “let” your account grow without taxation. At 73 they require you to distribute and begin to expose those funds to taxation. Taxation occurs at ordinary income tax rates – not at the more favorable capital gains rates. There is your trade-off, then: deferral of taxation while you are in the accumulation phase (a plus) vs. higher taxation at ordinary income tax rates in the distribution phase (a minus).

Note: there is no required minimum distribution for a Roth IRA during the owner’s lifetime. This is one of the tremendous benefits of choosing a Roth. For this reason alone many people consider a Roth conversion. Additionally, as of 2024, Roth 401(k) and other designated Roth accounts in workplace plans are also exempt from RMDs during the account owner’s lifetime – another significant benefit added by SECURE 2.0.

What if I’m Still Working?

The SECURE Act of 2019 repealed the prior prohibition on contributing to your traditional IRA past age 70½. So you can still work, still contribute to a traditional IRA, but you must take RMDs once you reach age 73.

It works differently with your employer’s retirement plan. If you are a less-than-5% owner of the business where you are employed, you can skip the RMDs from that plan until you do retire. Furthermore, you can continue to contribute to your retirement account there. If you are more than a 5% owner, though, you must take RMDs – but you are still able to defer your salary into the retirement plan and receive your employer’s match. In that case money is both coming into your account and going out in the same tax year.

You can find the complete IRS RMD Uniform Lifetime Table by searching online or in IRS Publication 590-B.

Summary: What Changed Under SECURE 2.0 (2022)

A Companion piece to this one is Income Opportunities in Charitable Giving.   You may also be interested in Get a Double Benefit From Your Charitable Contributions! (but only if you’re old) and Social Security Benefits.